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Market Gives Back Overnight Gains

Scott Redler

Despite a sizable gap up this morning, the S&P was the only index able to finish in positive territory Thursday (with a meager 0.03% gain). Overnight stocks were able to shrug off news that S&P had downgraded Spanish debt two notches to one level above junk, but selling during the session picked up right back where it left off the last three days. Tomorrow will be crucial to see whether we hold the 50-day MA in the S&P or plunge below it.

The high of the day in the S&P was 1443, which is the level right around where the accelerated uptrend broke down from. The overnight push amounts to an extremely feeble bounce attempt. Last night the oscillators went out at -50ish and was almost neutral by the open. The gap up burned off most of that oversold condition," but we are back to around -30 now.

IBD put us in Market Correction last night, and we share a similar methodology for measuring the technical action. The technical damage has been adding up for the last week or so, but there were multiple areas to trim and trail during the course of the rally. If you connect the dots, last Friday the market couldn't hold the Jobs Rally and closed near lows. Recently, most other breakouts have failed and have been sold rather than sustained. Strong stocks have started to give up their 8- and 21-day moving averages. The Nasdaq ETF (QQQ) broke its 50-day on Tuesday and since then still feels heavy.

Lately it has paid to be more tactical rather than to use a portfolio approach. Swinging long multiple positions for a sustained period works best when stocks and indices hold their upper level moving averages. Composure always needs to be evaluated as the markets are in motion. The 50-day moving average in the S&P has moved up to 1427. There is a pretty big support level in that 1422-1427 area, and then there is a small spot at 1416 with a bigger zone at 1397-1403.

On a macro basis we haven't even reached the 38.2% retracement zone measured from the June 4th lows. The 25% retracement level is 1422. In the strongest of environments, indices hold above this level on retracements. The question is: how strong is this market? The 38.2% retracement is 1395. Markets can see this level and still rally thereafter, markets are still deemed constructive and strong holding this type of retracement. The 50% retracement is 1370. Last year we hit a deeper retracement than this and were still able to take off in January. You just need to evaluate the time frame you approach the market and put it in perspective.

A positive sign for the market is the banks, which remain very strong. They seem to be pricing in strong earnings reports, but we will get more answers tomorrow morning as Wells Fargo (WFC) and JP Morgan (JPM) report.

*DISCLOSURES: Scott Redler is short SPY. Traded but flat LVS, AAPL, DIA, JPM.